Giving Thanks, Double Dip Unlikely

Monday Morning Outlook

Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 11/16/2020

Give Thanks! The US economy continues to heal. Payrolls keep growing, unemployment claims - though still elevated - are shrinking, key measures of the manufacturing and service sectors remain well into positive territory, and, as this week should show, both retail sales and industrial production remain on an upward trajectory.

While some investors are concerned about the near-term outlook for the economy given the recent increase in cases of COVID-19, we have yet to see signs of a double-dip recession. Yes, some locations have begun imposing new limits on economic activity, and others may follow. But businesses have come a long way, learning how to adapt and move forward from the mid-March environment, back when dealing with COVID19 was brand new.

Think about businesses built around people commuting to work or leaving the office and going out to lunch; those operations have already shrunk substantially, putting another decline of that magnitude virtually out of the picture. Meanwhile, consumers have shifted their spending, generating jobs elsewhere. For example, home improvements are on track to hit a calendar-year record high in 2020. Housing starts will be the highest for any year since the crash in housing more than a decade ago. Warehousing & storage jobs are at a record high, as are courier & messenger jobs.

We don’t have the data yet, but migration between states and cities appears to have picked up substantially in 2020, as people leave areas that have experienced either excessive violence or draconian pandemic-related lockdowns. This is just another piece of evidence that businesses and individuals have found ways to continue being productive in the face of unprecedented events. For this, and other reasons, we don’t see a double-dip recession.

Imagine being told back at the beginning of 2020 that the world was about to be hit by a global pandemic that would lead to massive government-imposed shutdowns of business activity around the country. Imagine being told that we were going into a sudden (and sharp) recession which would see the largest single-quarter decline in economic activity since the Great Depression.

As an investor with that knowledge, what would you have done? Would you bail out of the stock market completely, or go all-in? We watched many run for cover as stocks fell sharply.

And yet, as of the close on Friday, the S&P 500 was up 11.0% year-to-date, and that doesn’t include reinvested dividends. The market is up for a number of reasons. 1) The S&P 500 includes many large tech companies that we could not have lived without, and many companies considered “essential.” 2) The Federal Reserve pushed the discount rate down significantly. 3) Government stimulus helped support consumer spending. 4) Companies adapted and lowered expenses, and 5) Many people accepted the risk of behaving somewhat normally as they looked at the data surrounding the virus.

The resilience of the economy and corporations has rarely been tested as it was this year. This experience, combined with recent announcements about vaccines and therapies, will lead to further economic growth. When a business had no idea how long it would be before a vaccine for COVID-19 was available, it made sense to postpone some investments indefinitely. But when the distribution of an effective vaccine looks like it’s around the corner, they can begin to take action on long-term plans even before the economy is fully healed. Much of the uncertainty – be it about vaccines, the Supreme Court, or the elections - has now more or less passed.

Some uncertainty remains, it’s never fully gone, but when we compare the unknowns of today to that of just seven months ago, the risk to remaining invested in great companies has substantially declined. Give thanks for progress. A double-dip, while always possible, is unlikely.

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

11-16 / 7:30 am Empire State Mfg Survey – Nov 13.8 13.5 6.3 10.5

11-17 / 7:30 am Retail Sales – Oct +0.5% +0.3% +1.9%

7:30 am Retail Sales Ex-Auto - Oct +0.6% +0.3% +1.5%

7:30 am Import Prices – Oct 0.0% -0.2% +0.3%

7:30 am Export Prices - Oct +0.2% -0.1% +0.6%

8:15 am Industrial Production – Oct +1.0% +0.8% -0.6%

8:15 am Capacity Utilization – Oct 72.3% 72.0% 71.5%

11-18 / 7:30 am Housing Starts – Oct 1.460 Mil 1.471 Mil 1.415 Mil

11-19 / 7:30 am Initial Claims – Nov 14 700K 697K 709K

7:30 am Philly Fed Survey – Nov 22.0 31.0 32.3

9:00 am Existing Home Sales – Oct 6.450 6.680 Mil 6.540 Mil

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance.

No Wave is Good News For Stocks

Monday Morning Outlook

Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 11/9/2020

While the election is still not certified, and court battles will drag on, it appears that we can draw two firm conclusions from the 2020 election. First, the pollsters were horribly wrong again. Secondly, American voters do not want a radical shift in economic policy.

While Vice President Biden declared victory based on statistical evidence compiled by the media, there remains some ambiguity. States have not yet formally certified their election results, President Trump is pushing back with court cases, and recounts will be automatic in some states because of the closeness of the results. That said, the odds favor a Joe Biden Presidency for the next four years.

But, for at least the next two years, he will be interacting with a Congress that looks much different from the Blue Wave that pollsters expected. We know it is 2020, and anything can happen, but after Alaska and North Carolina report, it appears that Republicans will have at least 50 seats in the US Senate. The outcome of two runoff elections in Georgia, taking place in early January, will determine the final Senate make-up and it appears Republicans will win at least one of those.

In addition, Democrats lost perhaps 10 seats in the House of Representatives and when all the counting is done, we expect the Democrats will have about 224 seats versus about 211 for Republicans. Because mid-term elections have historically favored the party out of power, this result is causing the moderate wing of the Democrat party to push back against their more progressive members.

This pushback has teeth because Republicans around the country, in both House and Senate races, generally won by greater margins or lost by narrower margins than President Trump in their districts and states. And Republicans increased their power at the state legislative level.

As far as policy goes, what all this means is that a major tax hike, the Green New Deal, Medicare for All, and court packing are off the table. Yes, a Biden Administration will generate more rules and regulations, but the federal courts and all those Trump appointees during the past four years are likely to make sure agencies and departments stick to their legal mandates as passed by Congress.

In terms of legislation, we do expect Congress to pass a stimulus bill in the lame duck session, but it will not be the $3 trillion that Speaker Pelosi and the Democrats were pursuing before the election. It will not bail-out the states, which is particularly painful for Illinois, but we still expect a $1 trillion package to help with distributing a vaccine and provide more money for unemployed workers.

Next year, investors should expect some sort of infrastructure spending package, passing with bipartisan support. Because President Biden will need to get some sort of tax victory, look for an increase in the itemized deduction for state and local taxes, to around $20,000 from the current level of $10,000. Normally the GOP would oppose this policy change – it’s a bigger tax cut for residents in high-tax states, who tend to vote for Democrats, than for people in low tax states, who tend to vote for Republicans – but it’s still a tax cut, not a hike.

Trade wars are off the table, however, it will be hard for a new White House to justify going soft on China or for reversing progress made toward peace in the Middle East.

Meanwhile, the economy continues to grow and corporate performance continues to improve. According to FactSet, 89% of all S&P 500 companies have reported earnings for the third quarter and 86% of them have reported earnings above expectations. This is happening for two reasons. First, revenues have been better than expected, and second, costs have been cut as companies have adapted to challenging times. Productivity is up 4.1% from a year ago.

With news of an effective vaccine, expectations that fiscal policies will not change in any major way, continued low interest rates, and the entrepreneurial power of the US economy, the stock market is well on its way to continue making new highs. As we have reminded investors over and over, personal political preferences can cloud judgement. This past week makes that point, powerfully.

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

11-12 / 7:30 am Initial Claims – Nov 7 725K 731K 751K

7:30 am CPI – Oct +0.2% +0.2% +0.2%

7:30 am “Core” CPI – Oct +0.2% +0.2% +0.2%

11-13 / 7:30 am PPI – Oct +0.2% +0.2% +0.4%

7:30 am “Core” PPI – Oct +0.3% +0.2% +0.4%

9:00 am U. Mich Consumer Sentiment -Nov 82.0 82.3 81.8

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

No More Lockdowns

Monday Morning Outlook

Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 11/2/2020

As the US opened up, real GDP rebounded sharply in the third quarter, growing at a 33.1% annual rate. However, real GDP is still down 2.9% from a year ago and the economy got a huge boost from spending by the federal government, which borrowed from the future in order to allow people to spend today.

The federal government spent $6.55 trillion in the Fiscal Year ending September 30, 2020, up 47.3% from FY2019. In total, the federal government spent 31.2% of GDP, the highest share since 1945. In the final year of World War II, national defense spending was 36.6% of GDP, while all other spending combined was only 4.4%. This past year, military spending was 3.5% of GDP, all other spending combined was 27.7%.

Some of this money was spent directly “fighting” the virus – ventilators, PPE, field hospitals, payments to hospitals for COVID-19 patients – but most was used to support small business and workers during the pandemic. To put this in perspective, non-defense spending in 2020, as a share of GDP was 40% larger than its previous peak of 19.8% of GDP back in 2009.

This can’t continue. Although the current debt of the US government is manageable, and would be even more so if we locked in low interest rates by issuing longer-term debt securities, that doesn’t mean we can indefinitely run annual budget deficits of more than $3 trillion, like we did last year.

Super-high spending during World War II was a price America decided to pay in order to preserve civilization and the American way of life. Now we’re spending massive amounts so we can keep businesses shut to try to fight a virus.

Certainly, some measures need to be taken to secure the most vulnerable, like the elderly, or people with underlying health problems. But we also need to come to grips with the fact that shutdowns cause long-term harm. We all know the physical and mental health problems that business and school closures have on people. These are real. What is talked about less is the fact that the kind of government spending we are seeing can have long-term consequences for the economy and our ability to deal with future problems. This is compounded by the fact that our government wants another $1 - 3 trillion in spending to address continuing economic problems.

A vaccine may come along that helps us deal with COVID-19 (and we hope it does), but that vaccine will only help with “one” virus, not all of them. At least by winning WWII we stopped anyone from trying to take over the world.

If another virus comes along, will we do the same thing – shutdown the economy, print money and spend – again?

We certainly hope not. The debt and money printing the US has done can only be absorbed by economic growth in the years to come. After WWII, the US economy expanded rapidly, partly because it was less damaged by war, which allowed us to reduce the debt burden as a share of GDP. This time is different. We can’t lockdown again.

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

11-2 / 9:00 am ISM Index – Oct 55.8 56.2 59.3 55.4

9:00 am Construction Spending – Sep +1.0% +0.7% +0.3% +1.4%

11-3 / 9:00 am Factory Orders – Sep +1.0% +0.5% +0.7%

afternoon Total Car/Truck Sales – Oct 16.5 Mil 16.0 Mil 16.3 Mil

afternoon Domestic Car/Truck Sales – Oct 12.5 Mil 12.5 Mil 12.8 Mil

11-4 / 7:30 am Int’l Trade Balance – Sep -$63.9 Bil -$63.9 Bil -$67.1 Bil

9:00 am ISM Non Mfg Index – Oct 57.5 57.6 57.8

11-5 / 7:30 am Initial Claims - Oct 31 735K 730K 751K

7:30 am Q3 Non-Farm Productivity +5.0% +7.6% +10.1%

7:30 am Q3 Unit Labor Costs -10.0% -13.6% +9.0%

11-6 / 7:30 am Non-Farm Payrolls – Oct 600K 600K 661K

7:30 am Private Payrolls – Oct 700K 700K 877K

7:30 am Manufacturing Payrolls – Oct 53K 35K 66K

7:30 am Unemployment Rate – Oct 7.7% 7.6% 7.9%

7:30 am Average Hourly Earnings – Oct +0.2% +0.2% +0.1%

7:30 am Average Weekly Hours – Oct 34.7 34.6 34.7

2:00 pm Consumer Credit– Oct $8.3 Bil $5.0 Bil -$7.2 Bil

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Economy Poised for More Growth

Monday Morning Outlook

Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 10/26/2020

To reiterate, this Thursday morning we expect the government to report a huge, and virtually unprecedented, surge of a 33.4% annualized growth rate in real GDP growth for the third quarter. There are still a few monthly reports due this week that could affect our forecast, but only slightly.

Obviously, the US will not keep growing at this rate, but the question remains about how much might it slow? Believe it or not, because we have September data – the "jumping off point" for the fourth quarter – we can start to make some early estimates about reported future growth rates. Right now, an annualized growth rate of 5% is highly possible and it could be even higher.

All of this depends on COVID-related shutdowns. As the US conducts more that 1 million tests per day, and uses highly sensitive tests as well, there has been a new "surge" in COVID-19 cases. In spite of this surge in new cases, deaths have remained relatively stable. This means the "case fatality rate" is falling. Nonetheless, because of fear about the surge in new cases, some politicians, like Illinois Governor Pritzker, have shutdown activities like indoor dining. So far, these new shutdowns are not widespread enough to alter the course of the macro-economy in any significant way, but that could obviously change.

If it doesn't, and US economy holds its September activity level, the fourth quarter is looking strong. Take cars and light trucks, for example, which sold at a 16.34 million annual rate in September versus the third quarter (July, August and September) average of 15.38 million. In other words, auto sales were an annualized 27.3% higher in September that the third quarter average. So, if vehicle sales flatline in the fourth quarter (October, November and December), they would be 27.3% higher, at annual rate, versus the third quarter average. The same goes for retail sales outside the auto sector: even if they remain unchanged in October, November, and December, the September level was already 4.7% annualized above the average level for Q3.

Single-family home building shows a similar pattern. Without any change in single-family housing starts for the last three months of the year, the quarterly average would still show growth at a 28.8% annual rate versus the Q3 average. Note that this is not true for multi-family housing starts, but those starts are so volatile from month to month that the jumping off point in September is less meaningful.

Rest assured we are not just cherry-picking the very best data. The total number of hours worked in the private sector were up at a 3.9% annual rate in September versus the Q3 average. Manufacturing output was up at a 0.8% annual rate in September versus the Q3 average. Both the ISM Manufacturing and ISM Service indexes finished September higher than the average for the third quarter. So, while some data reflect very strong growth and other data reflect more moderate growth, the general direction of the economy remains positive.

Given that we are nearing a presidential election, there are many unknowns regarding public policy for the next several months. Future tax rates on regular income, capital gains, and dividends, spending, tariffs, regulations,...all up for grabs. Who knows, maybe even the addition of states, additional limits on the Senate filibuster, and Court packing, as well.

That's why it's important to take stock of where we are right now. A full recovery from the disaster earlier this year is a long way off, but we believe that recovery started several months ago, and the early read is that the fourth quarter should be solid, as well.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Covid-19 360 Game Changers

Coronavirus Webinar Presentation

Larry Adam, CFA, CIMA®, CFP®
Chief Investment Officer

September 14, 2020

Webinar Replay: Chief Investment Officer Larry Adam discusses the latest in vaccines and therapeutics, potential virus hot spots and school reopening.

Click the link to view presentation: https://www.raymondjames.com/investment-strategy-client-call

The views expressed in this commentary are the current opinion of the Chief Investment Office, but not necessarily those of Raymond James & Associates, and are subject to change. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Past performance is not indicative of future results. No investment strategy can guarantee success. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. Investing involves risks including the possible loss of capital. Material is provided for informational purposes only and does not constitute a recommendation. Asset allocation does not ensure a profit or protect against a loss. Diversification and asset allocation do not ensure a profit or protect against a loss. Dollar cost averaging cannot guarantee a profit or protect against a loss, and you should consider your financial ability to continue purchases through periods of low price levels.

Equities Pull Back From Early September Highs

Markets and Investing

September 21, 2020

The Dow Jones Industrial dipped almost 3% on Monday, and the S&P 500 slid more than 2% from the previous week, off about 7% from its recent highs earlier this month.

Investors have had a lot to process over the past few days. Domestic equity declines, on top of global ones, dovetailed with the loss of legendary Supreme Court Associate Justice Ruth Bader Ginsburg, as well as a rise in COVID-19 cases across the nation. The Dow Jones Industrial dipped almost 3% on Monday, and the S&P 500 slid more than 2% from the previous week, off about 7% from its recent highs earlier this month. Large-cap tech names, which had experienced a run up in recent months, began to drag on the broader markets this week, while the rest of the stocks generally held their ground.

September has historically been a weak month for equities. Chief Investment Officer Larry Adam has repeatedly cautioned that this seasonal slump combined with expected election volatility and valuations at their highest level in almost two decades could make the equity markets vulnerable to the modest pullback we’re seeing now.

Progress on the pandemic has been a mixed bag of late, one step forward, two steps back. The daily average number of cases jumped 17% within a week, according to Healthcare Analyst Chris Meekins, although the seven-day average continues to hover around 5%. Labor Day gatherings, schools reopening and relaxed mitigation measures likely all contribute to the uptick, he believes.

The passing of Justice Ginsburg leaves an opening on the Supreme Court late in an already-contentious presidential election cycle – potentially ushering in a partisan political battle, as well as a shift in the electoral landscape, according to Ed Mills, Washington policy analyst.

The latest economic reports also reflect a more moderate recovery, following sharp-but-partial improvement over the summer, explains Chief Economist Scott Brown. The Federal Reserve continues to do its part to provide liquidity to the financial system, but another round of government assistance might be hindered by political division ahead of the election with a Supreme Court vacancy in the balance.

We continue to view unprecedented global stimulus and record low interest rates as supportive of equities over the intermediate term, adds Senior Portfolio Analyst Joey Madere, who sees short-term volatility as potential opportunity to selectively add to a portfolio.

Your financial advisor can help address any questions you may have about recent volatility and its effect on your financial plan.

Investing involves risk, and investors may incur a profit or a loss. All expressions of opinion reflect the judgment of Raymond James and are subject to change. There is no assurance that any of the forecasts mentioned will occur. Past performance is not indicative of future results. Economic and market conditions are subject to change. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow”, is an index representing 30 stocks of companies maintained and reviewed by the editors of the Wall Street Journal. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. It is not possible to directly invest in an index.

Thoughts On The Market

Putting Market Activity Into Perspective

Larry Adam, CFA, CIMA®, CFP®, Chief Investment Officer

September 8, 2020

With the ‘unofficial’ end of summer marked by the Labor Day weekend, the S&P 500 and NASDAQ have disappointingly fallen 7% and 10%, respectively, over the last three days. Throughout this recent pullback, it has been the sectors with the strongest year-to-date returns that have led the decline. Pullbacks within the equity market are always unsettling, so below are ten points to put the recent decline into perspective and, hopefully, reduce investors’ elevated levels of anxiety.

1. First Three Consecutive Daily Declines in Three Months It is unusual for the equity market to move up in an uninterrupted, straight line. In fact, this recent three-day pullback marked the first three consecutive day decline since June 11 and only the second since March 10. Over the last ten years, it is common to see the equity market exhibit short bouts of volatility like this. In fact, on average, the S&P 500 typically has ~10 individual periods of three consecutive days of declines over a six-month time period (that is almost twice a month). Volatility is part of the fabric of the market.

2. Back to Levels of One Month Ago Despite the S&P 500’s 7% decline over the past three days, it sits at the levels we saw just one month ago! Additionally, the S&P 500 and NASDAQ are up 3% and 21%, respectively, year-to-date. Both were at record highs just one week ago.

3. Still the Second Strongest Bull Market at this Juncture Even with the recent weakness, the S&P 500 remains up ~50% off of the lows on March 23. This marks the second strongest start to a bull market at this juncture

4. Best Summer Since 2009 Even with the recent pullback, the S&P 500 posted the best summer return (up 16% from Memorial Day to Labor Day) since 2009 and the second best over the last 50 years. This reflects how strong the recent momentum in the market has been despite continued COVID and political uncertainties.

5. September Is the Weakest Month On an historical basis, September (particularly during an election year) has been the weakest month of the year, on average. While volatility tends to increase during September and October, the market pullbacks, on average, tend to be relatively contained and offset by a rally in November and December.

6. Pullbacks Are Normal Not only have we rallied strongly and very quickly, it is not uncommon to see pullbacks in a given year. In fact, over the last 30 years, the market typically experiences approximately four 5% or more pullbacks a year, on average. Year-to-date, this is the third.

7. Improving Economy Evidenced by both the improving labor market report (1.4 million jobs added and unemployment rate falling to 8.4%), and a strong ISM reading (the new orders subcomponent rose to the highest level since 2004) last week, the US economy continues to recover from the COVID-driven weakness. We forecast 3Q US GDP to rebound and grow ~30% and improving economic activity should remain supportive for the US equity market.

8. Continue to Believe in a Phase 4 Package As both political parties continue to jockey around a Phase 4 stimulus package, our Washington Policy Analyst, Ed Mills, believes that there will be an agreement. Further fiscal stimulus (particularly targeting the consumer) should be supportive of both consumer spending and the equity market.

9. Improving Earnings While earnings expectations had been slashed following the COVID-driven crisis, earnings throughout the second quarter came in significantly better than expectations. Going forward, we expect earnings to continue to improve as fullyear 2020 and 2021 Earnings Per Share (EPS) expectations continue to move higher. Our S&P 500 2021 earnings forecast is ~$160, with room for upside.

10. US Equities Remain Technically Sound Despite the recent pullback, US equities remain above both their 50-day (3,305) and 200-day (3,094) moving averages. Technicians will look for these to remain levels of support. Staying above these moving averages will continue to portray a technically sound equity market. From a sentiment perspective, there were several technical indicators that suggested the equity market was ‘overbought’ and in need of a consolidation period. For example, given the rally before the recent pullback, put/call ratios moved to multiyear lows (showing investors becoming complacent) and the 14-day Relative Strength Index (RSI) rose to the highest level in 2.5 years and moved into the 99th percentile over the last 30 years.

Bottom Line: Given how far and fast the equity market had rallied, it is not surprising to experience a period of consolidation and digestion. Given that valuations on both a trailing and forward basis remain near multi-year highs, the market was priced to perfection and susceptible to disappointments. Near term, equities are likely to remain volatile with the potential for further weakness due to the uncertain timing for a potential COVID vaccine, fiscal relief deliberations, the upcoming presidential election and burgeoning tensions with China. However, the trajectory for US equities is higher over the next 12 months (12-month target 3,600) as a result of improving global economic activity, recovering earnings and still supportive fiscal and monetary policy. As a result, we believe that long-term investors should continue to use periods of weakness as buying opportunities to add to our favorite sectors (Information Technology, Communication Services, Health Care and Consumer Discretionary).

To view whole article click the link below:

https://www.raymondjames.com/-/media/rj/dotcom/files/advisor%20opportunities/totm-putting-market-activity-into-perspective

The Housing Revival

Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

August 24th, 2020

The US economy got crushed in the second quarter, with the worst decline in real GDP for any quarter since the Great Depression. However, the long road to recovery has started and, for now, we’re penciling in real GDP growth at a 20% annual rate for the third quarter. Of all the parts of the US economy that have weathered the COVID-19 storm, none has been as resilient as the housing market.

Homebuilders started homes at a nearly 1.6 million annual rate in December, January, and February, before the Coronavirus and government-mandated shutdowns wreaked havoc. Those were the best three months since 2006 and showed that residential construction had finally fully recovered from the housing implosion that was a center point of the last recession.

Then, during the shutdowns, homebuilding plummeted: housing starts bottomed at a 934,000 annual pace in April, before gaining in May, June and July, hitting an almost 1.5 million pace last month.

We have been saying for the past several years that the fundamentals of the housing market suggest an underlying norm of 1.5 million housing starts per year. This is based on a combination of population growth (more people mean more housing) and scrappage (homes don’t last forever, either because of voluntary knockdowns, fires, floods, hurricanes. tornadoes,…etc.).

However, in the ten years ending in February (March 2010 through February 2020) builders had only started 1.011 million units per year. Part of this made sense: home builders started too many homes during the housing bubble and the only way to work off that excess inventory was to build fewer homes than normal. But, in our view, the inventory correction went too far. In the 20 years through February (March 2000 through February 2020), housing starts only averaged 1.265 million. Too low.

All of this suggests to us that home builders still need to make up for lost time, until the long-term average is closer to 1.5 million per year, which could mean reaching, and then averaging, a pace of something like 1.8 million starts for the next several years.

But it’s not only home building that’s recovered so quickly; home sales have revived, as well. Existing homes were sold at a 5.76 million annual place in February, the fastest pace since the housing bubble burst. Then sales plummeted in March, April, and May, bottoming at an annualized pace of 3.91 million, the slowest since 2010. Since May, however, sales have soared, hitting a 5.86 million annualized pace in July, even beating where we were in February.

Part of the recent gain was likely pent-up home purchases: people who wanted to buy earlier in the year but got temporarily thrown off track by the Coronavirus, massive economic contraction, as well as general uncertainty. But including the drop and the rebound, the average pace of sales in the last five months (March through July) is still slow, suggesting some further gains ahead. Ditto for new home sales, although neither existing nor new home sales will grow every month.

In terms of prices, we expect national average home prices to continue to grow, but with a wide dispersion. Dense cities hit hard by COVID-19, or which have seen social unrest (or both!), especially with the newfound ability to work remotely, are going to be relative losers; other metro areas are going to experience faster gains.

Yes, a Biden win in November could end up expanding the state and local tax deduction, helping some beleaguered cities. But that election outcome is not assured. The enlarged standard deduction would still mean fewer people itemize, and the Biden campaign wants to limit the “value” of itemized deductions to 28% (instead of a proposed top tax rate of 39.6%). Bottom line: housing is going to be a significant tailwind for the US economy overall, but not everywhere.

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

8-25 / 9:00 am New Home Sales – Jul 0.785 Mil 0.772 Mil 0.776 Mil

8-26 / 7:30 am Durable Goods – Jul +4.5% +5.0% +7.6%

7:30 am Durable Goods (Ex-Trans) – Jul +1.8% +1.3% +3.6%

8-27 / 7:30 am Initial Claims – Aug 22 1.000 Mil 1.040 Mil 1.106 Mil

7:30 am Q2 GDP Preliminary Report -32.5% -32.4% -32.9%

7:30 am Q2 GDP Chain Price Index -1.8% -1.8% -1.8%

8-28 / 7:30 am Personal Income – Jul -0.4% -0.5% -1.1%

7:30 am Personal Spending – Jul +1.5% +1.5% +5.6%

8:45 am Chicago PMI 52.5 51.2 51.9

9:00 am U. Mich Consumer Sentiment- Aug 72.8 73.0 72.8

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

A Healing Economy

Monday Morning Outlook
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
August 10, 2020

It's going to take years for the US economy to fully heal from the economic disaster brought about by COVID-19 and the government-mandated shutdowns which continue to limit economic activity across the country. When we talk about a full recovery, we don't simply mean getting real GDP back where it was in late 2019; a full recovery comes when the unemployment rate gets back below 4.0%, and we don't see that happening until at least late 2023.


Yet last week's key reports on the economy clearly show we're recovering. The ISM Manufacturing and Service indices, autos sales, and the employment report all beat expectations. The Manufacturing index came in at 54.2, while the sub-indices for new orders and production both exceeded 60.0 for the first time since 2018. The ISM Services index hit a robust 58.1 for July, the highest reading so far this year, including back in January and February when the economy was doing quite well. The new orders sub-index for services hit 67.7, the highest on record (dating back to 1997).


Meanwhile, consumers felt healthy enough to keep increasing auto purchases. Cars and light trucks were sold at a 14.5 million annual rate in July, the highest since February, when sales were 16.8 million annualized. To put this in perspective, auto sales bottomed at an 8.7 million annual rate in April, so this is one sector which is very nearly healed.


Of course, the big news for the week came with Friday's employment report, which showed payrolls expanding faster than anticipated while the unemployment rate declined further. Nonfarm payrolls rose 1.763 million, while civilian employment, an alternative measure of jobs that includes small-business start-ups, increased 1.350 million. Combined with jobs gains in May and June, these figures show that we've recovered roughly 40% of the jobs lost in the carnage of March and April.


The best news was that both average hourly earnings and the total number of hours worked rose in July, with earnings up 0.2% and hours up 1.0%. Recently, these two figures have moved in opposite directions. At first, layoffs tilted toward lower paid workers, which meant average earnings for the remaining workforce were rising while total hours worked fell. Then, as hours rebounded and (disproportionately) lower-paid workers were rehired, the pattern reversed. Now they're rising at the same time.


In addition, recent declines in unemployment claims signal that the improvement in the labor market is continuing. Initial jobless claims came in at 1.186 million in the latest week, 249,000 fewer than the prior week and the lowest level since March. Continuing claims for regular benefits fell 844,000 to 16.1 million, the lowest since April.


It's still early – the initial report on real GDP growth in the third quarter won't be released until October 29 – but plugging all these reports, as well as earlier ones, into our models suggests growth at a 15.0% annual rate.


But along with faster growth, we're also going to see higher inflation. Broad measures of the money supply are growing rapidly, while the Federal Reserve remains committed to keeping short-term rates low as far as the eye can see. The Fed doesn't think we'll hit its 2.0% inflation target until at least 2023. We think inflation will get there, and beyond, before the calendar closes on 2021.

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

8-11 / 7:30 am PPI – Jun +0.3% +0.3% -0.2%

7:30 am “Core” PPI – Jun +0.1% +0.1% -0.3%

8-12 / 7:30 am CPI – Jun +0.3% +0.3% +0.6%

7:30 am “Core” CPI – Jun +0.2% +0.2% +0.2%

8-13 / 7:30 am Initial Claims Aug 8 1.100 Mil 1.170 Mil 1.186 Mil

7:30 am Import Prices – Jul +0.5% +1.0% +1.4%

7:30 am Export Prices – Jul +0.4% +0.6% +1.4%

8-14 / 7:30 am Retail Sales – Jul +1.9% +1.8% +7.5%

7:30 am Retail Sales Ex-Auto – Jul +1.3% +1.6% +7.3%

7:30 am Q2 Non-Farm Productivity +1.5% +1.0% -0.9%

7:30 am Q2 Unit Labor Costs +5.7% +6.2% +5.1%

8:15 am Industrial Production – Jul +3.0% +2.4% +5.4%

8:15 am Capacity Utilization – Jul 70.3% 70.3% 68.6%

9:00 am Business Inventories – Jun -1.1% -1.1% -2.3%

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

The Bottom Fell Out

Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

July 27, 2020

Thursday’s initial report on real GDP growth in the second quarter is going to break records, and not in a good way.

Right now, it looks like the US economy shrank at a 35% annual rate in Q2. To put that in perspective, the worst quarter we’ve ever had since the military wind-down immediately following World War II was -10% in the first quarter of 1958, when, not by coincidence, the US was hit by an Asian flu. This is going to shatter that record by multiples and will likely be the worst since the Great Depression.

However, the US economy has already started recovering and we anticipate a strong report for the third quarter. Compared to the bottom in April, retail sales were up 27.0% in June; industrial production has rebounded 6.9%; housing starts, 27.0%.

Now, imagine retail sales, industrial production, and housing starts, are unchanged in July, August, and September; so, basically we’re flatlined from where we were in June throughout the third quarter. Even in that scenario, average retail sales in Q3 would be up at a 48.5% annual rate versus the Q2 average; industrial production would be up at a 17.2% rate; housing starts at a 66.5% annual rate. As a result, we’re penciling in real GDP growth at a 15% annual rate in Q3, assuming continued reductions in inventories.

This doesn’t mean a full recovery anytime soon. Eventually, the economy will pay a price for recent higher government spending and that price may be an eventual return to the Plow Horse growth of 2009-16. The unemployment rate is unlikely to return below 4.0% until at least 2023.

In the meantime, here’s how we get to our forecast for a 35% decline in real GDP for Q2:

Consumption: Car and light truck sales plunged at a 67.3% annual rate in Q2, while “real” (inflation-adjusted) retail sales outside the auto sector shrank at a 27.7% rate. Spending on services also fell: think restaurants & bars, dry-cleaning, daycare, health care services (outside COVID-19), Uber rides,…etc. The list goes on and on. We estimate that real consumer spending on goods and services, combined, fell at a 31.8% annual rate, subtracting 21.6 points from the real GDP growth rate (-31.8 times the consumption share of GDP, which is 68%, equals -21.6).

Business Investment: Business investment in equipment as well as commercial construction got rocked in Q2. Investment in intellectual property may have continued to rise, but we’re estimating a combined contraction at a 30% annual rate, which would subtract 3.9 points from real GDP growth. (-30 times the 13% business investment share of GDP equals -3.9).

Home Building: Residential construction got beat up like everything else in Q2, although in many places it was considered “essential.” We estimate a contraction at a 32.5% annual rate, which would subtract 1.3 points from the real GDP growth. (32.5 times the 4% residential construction share of GDP equals -1.3).

Government: Growth in national defense spending probably offset a drop in public construction projects in Q2, keeping overall government purchases steady, with zero net effect on real GDP growth in Q2.

Trade: The trade deficit soared in April and May as exports and imports both fell but exports fell even faster. At present, we’re projecting that net exports will subtract an unusually large 3.5 points from real GDP growth in Q2, although data out Wednesday morning in the trade deficit in June may alter this estimate, as well as our estimate for overall real GDP.

Inventories: Looks like inventories plunged at the fastest pace on record in Q2, suggesting a drag on real GDP of 4.7 points.

Add it all up, and we get -35.0% annualized real GDP for the second quarter. The key to remember is that we have already seen the worst of the crisis. The US economy will take years to get back to where it was before COVID-19, but a recovery has already started. Businesses and entrepreneurs have adapted and made the best of an awful situation, including massive government overreach. Better days are headed our way.

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

7-27 / 7:30 am Durable Goods – Jun +6.8% +7.5% +7.3% +15.7%

7:30 am Durable Goods Ex Trans – Jun +3.6% +4.0% +3.3% +3.7%

7-30 / 7:30 am Initial Claims - Jul 20 1.400 Mil 1.375 Mil 1.416 Mil

7:30 am Q2 GDP Advance Report -35.0% -35.0% -5.0%

7:30 am Q2 GDP Chain Price Index +0.1% -0.5% +1.4%

7-31 / 7:30 am Personal Income – Jun -0.7% -0.8% -4.2%

7:30 am Personal Spending – Jun +5.4% +5.5% +8.2%

8:45 am Chicago PMI 43.9 42.5 36.6

9:00 am U. Mich Consumer Sentiment- Jul 72.8 73.5 73.2

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

There's No Such Thing As A Free Lunch

Monday Morning Outlook

Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist

7/20/2020

“There is no such thing as a free lunch.” It’s been attributed to many different people, Milton Friedman and Robert Heinlein, among others. Regardless of who said it, we think it’s one of the most basic economic truths.

A lunch has to come from somewhere, and once it is consumed, it’s not available for someone else to consume. ‘Another way to say it, someone needs to produce what we consume. Supply comes before demand. Without supply – without production – we have nothing to bring to “the market” in exchange for something else. In Venezuela, production has plummeted due to socialist government policies, while inflation and hunger run rampant.

And the US is facing problems as well. Recent reports show a huge gap between supply and demand, a gap that can’t go on indefinitely. Retail sales in the US, a measure of demand, fell off a cliff in March and April, bottoming 21.7% below the level in February. Since then, retail sales have rebounded sharply, rising 18.2% in May and 7.5% in June. Amazingly, retail sales are now 1.1% higher than a year ago, during a time where unemployment has climbed from 3.7% to 11.1%.

By contrast, industrial production – one proxy for supply – hasn’t done as well. Industrial production fell a combined 16.6% in March and April and has since risen a more modest 6.9% combined in May and June, leaving it down 10.8% from a year ago.

How can Americans go out and buy more when they’re making less? The answer: borrowing from the future through government deficits. Government transfer payments in April and May, combined, were up 86.7% from a year ago due to COVID spending on “tax relief” checks that have been sent out by the IRS, as well as a surge in unemployment compensation, mostly because of more people collecting benefits, but also because benefits were increased substantially.

As a result, government transfer payments made up 30.6% of all personal income in April and 26.4% in May. Let’s say that again…government made up over 25% of all personal income in May!! From 2015 through February 2020, government transfers averaged roughly 17% of all consumer income. Prior to the Panic of 2008, transfer payments averaged 14%. This year, government transfer payments have been so generous that they’ve more than offset declines in wages & salaries and small business income.

Normally, the gap between the growth in retail spending and industrial production would be a sign that something is systematically wrong with the economy, and higher inflation is not long to follow. The only way people can spend more without producing more is if they’re spending inflationary dollars. That’s not a free lunch; it’s just that the cost of the lunch is paid for by reducing the value of all the money we use. (Sneaky, sneaky.)

The Federal Reserve has all but promised to remain loose for the foreseeable future. We haven’t seen this kind of monetary policy since the 1970s.

Consumer prices rose 0.6% in June, although, given steep price declines in March and April, consumer prices are still up only a modest 0.6% from a year ago. So we don’t have deflation, but for now signs of runaway inflation remain scarce.

One reason is that the personal saving rate has surged. The personal saving rate is the share of our after-tax income that we don’t spend on consumer goods or services. It hit 32.2% in April, the highest level on record - by far - going back to at least 1959. The next highest level was 17.3% in May 1975, and the average rate last year was 7.9%. The saving rate remained at a still elevated 23.2% in May.

The fact that people are not rushing out all at once to spend their transfer-padded incomes has helped keep inflation in check. The gap between consumer spending and production has also come in the form of big reductions in business inventories, a reduction that can’t continue forever (eventually, we’d run out of inventories to reduce).

We aren’t looking for hyper-inflation, but we do think the Fed is likely underestimating future price increases. The Fed expects the PCE deflator to rise 0.8% this year, 1.6% in 2021, and 1.7% in 2022. We’d take the OVER on all three.

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

7-22 / 9:00 am Existing Home Sales – Jun 4.800 Mil 4.660 Mil 3.910 Mil

7-23 / 7:30 am Initial Claims - Jul 18 1.293 Mil 1.250 Mil 1.300 Mil

7-24 / 9:00 am New Home Sales – Jun 0.700 Mil 0.710 Mil 0.676 Mil

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.